New Zealand Law Society - Lawyers Complaints Service: Censure, fine and apology ordered

Lawyers Complaints Service: Censure, fine and apology ordered

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A lawyers standards committee has censured a lawyer, A, who acted for several parties in a private company share transaction where there was a conflict of interest.

The complainants, C and his wife, claim that the lawyer’s advice has cost them $600,000 in losses and legal costs.

The committee found A guilty of unsatisfactory conduct, fined him $8,500, “to reflect the seriousness of the conduct”, $1,500 costs and ordered A to apologise to the complainants.

In 2009, A received instructions from the directors of a mortgage and insurance broking company to document the sale of one-third of the company’s shares to C (a share employee).

C and his wife had arranged to borrow money from the other two shareholders in the company to complete the transaction. The borrowing was secured by mortgages.

Draft shareholders agreement

In February 2010, A met with and witnessed the complainants’ signatures. A sent though the relevant documentation to the company via its accountant and also enclosed a draft Shareholders Agreement similar to a version he had sent in 2006 to the vendor shareholders.

No specific instructions to prepare the Shareholder Agreement had been received by A’s firm. As with the 2006 agreement, the draft agreement was never completed or signed.

The draft agreement contained provisions relating to the sale of shares based on “fair value” and set out a formula for the calculation of “fair value”.

In 2013 the three shareholders had a major falling out, and the complainants maintain that C was forced out of the company, and that they were forced to take legal action to protect their assets and investments in the company and its associates.

Mediation settlement

A told the committee that the complainants had defaulted on the loans made to them, but this was settled in mediation in 2014.

The complainants and the two directors respectively were separately advised and A represented the company. The committee noted that the outcome of the mediation was adverse to the complainants.

C and his wife claim that A acted for them as well as for the other shareholders and had a conflict of interest which had resulted in a significant financial loss to them.

This arose because the Shareholders Agreement had never been fully actioned. They sought an acknowledgement that A’s actions had “caused a loss of approximately $450,000 being the amount they would have been entitled to under the draft Shareholders Agreement plus an amount of $150,000 incurred in legal costs” as well as financial compensation for the loss incurred.

The complainants also claimed that no urgency had been placed on signing the Shareholders Agreement due to the understanding from A that it was an “implied agreement”, although the committee noted that there was conflicting evidence about this.

A told the committee that the draft agreement did not oblige the other shareholders to purchase the complainants’ shares, nor to do so at the price they claimed. Nor did the draft agreement protect the complainants from action by the other shareholders for defaulting on their repayments on the mortgages on their shares.

Previously acted

A had previously acted for C in 2004 in relation to a Shareholders Agreement for a different company. A’s firm also acted for the complainants and their family trust in respect of various matters in 2011 and 2012 (after the share purchase had been completed in 2009).

C maintains that he regarded A as his lawyer continuously during the period.

The committee referred to rule 6.1 of the Conduct and Client Care Rules that: “A lawyer must not act for more than 1 client on a matter in any circumstances where there is a more than negligible risk that the lawyer may be unable to discharge the obligations owed to 1 or more of the clients.”

The committee found that C “was justified in believing that [A] was acting for him and considered [A] to be his lawyer during the period in question” and that A “should have advised [C and his wife] at the outset to obtain their own advice.

The onus was on [A] to clarify who [A] was (and wasn’t) acting for”. The committee therefore concluded that A breached rule 6.1 of the Conduct and Client Care Rules.

The committee considered that it was not appropriate for it to determine whether compensation was payable and that that issue was best determined through the civil courts.

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